The exit of dairy operations since 2017 has attracted considerable attention. The 2022 Census of Agriculture confirms a profound decline, even within the context of the long-standing decline in dairy herds.
Editor’s note: The following was written by Carl Zulauf, Ohio State University, and Gary Schnitkey, University of Illinois, for the farmdoc daily website Feb. 23.
The economic pressure for fewer dairy herds is abating but remains notable. An important question is, “What role did current dairy policy play in the post-2017 consolidation?”
According to the 2022 Census, 24,094 U.S. farms sold milk during 2022. The largest number of dairy farms with milk sales had 50-99 cows. Another 11,942 farms had milk cows on Dec. 31, 2022, but had not sold any milk during 2022. Of these farms, 97% had less than 10 cows.
Fewer U.S. farms sold milk in 2022 than 2017 at all herd sizes except those with 2,500 or more cows. The latter increased from 714 to 834 farms. Herds of 20-49 cows declined the most on a percentage basis, followed by herds of 50-99 cows. In total, 39% fewer U.S. farms sold milk in 2022 than 2017.
Historical perspective
The 39% decline in all U.S. farms that sold milk between the 2017 and 2022 Census of Agriculture was the largest decline between adjacent censuses dating back to the 1982 Census. The next largest declines were 27% between the 2007 and 2012 Census and 26% between the 1992 and 1997 Census.
A question that emerges is, “What caused higher exits from dairy farming during 2017-22?” One factor was huge losses occurring over an extended period of time.
Since the decision to exit (and enter) dairy farming is a strategic investment decision, a 10-year sum was calculated of the net return above the economic cost of producing milk as computed by the USDA ERS. The 10-year sum starts with 1989 because 1980 was the first year USDA ERS published the cost of producing milk. An economic cost includes a cost assigned to unpaid labor and farm-produced feeds.
The cumulative 10-year net return to economic cost has been below -$10/cwt. since 1998. It was below -$30/cwt. from 2009 through 2018. The largest 10-year losses were -$37/cwt. in 2013 and -$36/cwt. in 2015. Since 2015, 10-year losses have declined almost 50%, equaling -$19/cwt. in 2022.
Economies of size
Additional perspective is gained when looking at the large economies of size that exist in U.S. milk production. Economies of size are much greater for non-feed than feed cost. Over 2016-22, highest and lowest cost differ by $2.50/cwt. ($12.87 to $10.37) for feed but by $19.59 for non-feed ($27.96 to $8.37). The large economies of size mean financial pressure from low returns to producing milk is much more acute for smaller herds, as the larger percent decline in smaller dairy herds illustrate.
An interesting feature of the economies of size relationship is that non-feed exceed feed costs for herds of less than 1,000 cows while feed costs exceed non-feed cost for herds of 1,000 or more cows and especially herds of 2,000 or more cows.
Discussion
A likely important factor underpinning the sizable decline between 2017 and 2022 is U.S. dairy sector financial stress that dates to the turn of the 21st Century. Dairy sector financial stress is likely abating but still remains notable.
Another likely important factor is the sizeable economies of size that exist in producing milk. They exacerbate sector financial stress for all but the largest dairy herds.
The sizeable economies of size are largely due to non-feed cost per cwt. of milk produced. Given the large difference in non-feed cost per cwt. across dairy herds, it is not surprising that changes in feed cost per cwt. have a much larger role in changes in total cost per cwt. for larger dairy farms.
The preceding point suggests a program that bases dairy policy payments on the milk price-feed cost margin, such as the current Dairy Margin Coverage program, is likely to provide the most protection against lower milk profitability for the largest dairy farms, although it is important to note that quantity of milk that can receive a DMC payment is capped.
If policy deliberations come to the conclusion that dairy policy should be more attentive to the financial stress on smaller dairy farms, policy options include the following:
- Scale DMC payments by the ratio of non-feed costs to feed costs for a given size dairy herd. In essence, DMC payment per cwt. could be higher than 100% for smaller dairy herds.
- Create a new payment program based on non-feed cost per cwt.
- Make a per-cow payment for a limited number of cows per dairy operation. Because implementing payment limits of any type is difficult since farms rearrange their operation to qualify for payments, a payment per cow could be made to all dairy farms up to the given number of cows. Smaller dairy farms would, however, receive the most benefit since a larger share of their cows would qualify for a payment.
All of these policy options could be implemented without changing current DMC payment calculations.
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